EnCana Corp. (ECA): Asset base continues to deliver, but we see better value elsewhere - Goldman Sachs - April 23, 2008
What's changed
EnCana reported adjusted 1Q2008 EPS of $1.38, above our estimate of $1.20 and the First Call consensus of $1.31. The better than expected EPS was driven by much higher than expected realized commodity prices. Operating cash flow was $2.3 billion versus our estimate of $2.1 billion. Production was slightly lower than expected while unit operating costs were slightly higher. Refining operating income was $61 million versus our estimate of $100 million. We have updated our 2008-2012 EPS estimates.
Implications
EnCana’s recent trend of exceeding quarterly EPS expectations continued in 1Q2008, though underlying operating performance was generally in line. On the 1Q conference call, management highlighted EnCana’s exposure to emerging resource plays that have garnered significant interest from the Street in recent months, including the Montney and the Horn River, each in Canada. While we view EnCana’s asset base as strong, we continue to believe that other large-cap E&Ps provide less expensive exposure to North America natural gas production growth. For exposure to the Horn River play, we prefer EOG Resources and Apache, and for exposure to the Montney we prefer Talisman Energy.
Valuation
EnCana trades at 6.4X 2009E enterprise value/debt-adjusted cash flow versus 5.4X for large-cap E&Ps. We see 6% upside to our $88 DCF-based 12-month target price for EnCana shares, vs. 11% upside for E&Ps. We continue to rate EnCana Sell relative to an Attractive coverage view. We believe the shares can continue to perform well on an absolute basis given our bullish commodity outlook, but the relative valuation and risk/reward in our Neutral and Buy rated stocks is more favorable, in our view.
Key risks
Commodity price volatility, cost pressures, drilling results, and government pronouncements are key risks to our view and target price. |
